Do I Stay or Do I Go?

Is it Worth it to Stay with a Distressed Company?

You have been agonizing whether it is worth it to stay with your distressed company, or to leave and find something else to do. Your stock options are worthless, several of your colleagues have already left and your job has become exponentially more difficult. You have begun asking yourself, “What’s in it for me?”

This is a very personal matter, and the answers may vary accordingly. Depending upon the company’s particular circumstances, a given individual may already be exposed to litigation risk. Securities prices may have tanked precipitously. Or the company may have made decisions which it now regrets in hindsight. With such issues in the background, attorneys may advise that an officer or director should consider staying with the ship. Not only can the individual seek to influence the outcome positively (thereby reducing damages), but he may also be able to negotiate releases for himself from some (if not all) of the affected constituencies.

Other Benefits of Staying

Key employees that remain can also be rewarded with compensation plans that provide hefty bonuses for turning the company around and righting its capital structure. There may also be opportunities to benefit from compensation packages established in connection with new investment.  And it’s probably better to be seen as taking steps to fix the problem rather than leaving serious issues behind. Further, having a successful turnaround on your resume can indeed bolster your future earnings potential.

But There are Risks . . .

On the other hand, a turnaround is risky and the tremendous effort involved would require a great expenditure of time for each officer and director:

  • There certainly would be no guarantee of success (with promised “stay bonuses” potentially evaporating in insolvency proceedings) and any litigation risk could even expand.
  • For those hoping to avoid having a bankruptcy on their resumes, SEC reporting requirements mandate disclosure of association with distressed companies, unless the departure from a director or officer position occurred with sufficient “white space” in time before a bankruptcy.
  • Worse, if there is fraud involved or the story ends with an ugly “crash and burn” (think Theranos), personal reputational damage can even get worse.

Make an Informed Decision Before Events Do It For You

If you are experiencing concerns about the wisdom of remaining with your employer, we highly recommend that you begin to assess the situation by answering the following questions:

  • Can the business stand on its own, or does it rely on continuing investment by creditors? Is the company generating positive cash flow before debt service? After debt service on secured debt? After all debt service? Will this dynamic change in the foreseeable future?
  • Is this a melting ice cube? If the company is in serious decline, how long does it have before there will be nothing left?
  • Are there near-term sources of liquidity? Does the company have cash or other valuable assets that are not encumbered by liens?
  • What is the relationship between business values and the “capital stack”? What is the value of the company in the public or merger marketplaces? Or the value of major components of the business? How do these values compare with the face amount of indebtedness (both secured and total debt)?
  • Are there any “big shoes” yet to drop? Is there a major dispute that has not yet reached litigation? Is a major customer considering discontinuing the relationship? Are there product problems that will result in warranty claims, or worse?
  • Is the company’s leadership up to the challenges? Given the realities of the situation, what do you think the Board will do? Are there major constituencies that would step up to rescue the company?

Answers to the foregoing can help frame (perhaps with the input of potential financial and legal advisors) the likely outcomes for the company and the probabilities of success. And from there, you can make judgments about your next moves based upon your own risk tolerance.

At Gordian Group, we are delighted to field these kinds of confidential inquiries.
To set up a call, please contact Leslie Glassman at ljg@gordiangroup.com.

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About the Series
Questions that Keep CFOs Up at Night

Dealing with the prospect of financial distress is obviously unsettling. People can potentially lose everything they have worked for their entire lives. Risks abound, with cash crises, creditor pressures, employee defections, and so forth. In addition, professionals and others have their hands out for fees (going broke ain’t cheap) and companies should be rightly concerned about “agendas” that may differ dramatically from those of the company, its owners and its management.

See the entire series here. Please subscribe above to receive an alert when we publish new posts. If you have a question that we haven’t addressed, please email us at info@gordiangroup.com